Wednesday, March 13, 2013

Fundamental Vs. Technical Analysis

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities.

The Differences
Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. (For further reading, see Introduction To Fundamental Analysis and Advanced Financial Statement Analysis.)

By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements) for the purposes of this tutorial, this simple tenet holds true.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.

The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. (For more insight, read Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)

Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.

Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.

The Critics
Some critics see technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well.

Much of the criticism of technical analysis has its roots in academic theory - specifically the efficient market hypothesis (EMH). This theory says that the market's price is always the correct one - any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless.

There are three versions of EMH. In the first, called weak form efficiency, all past price information is already included in the current price. According to weak form efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stock's past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental analysis can provide investors with an edge. The vast majority of academics believe in at least the weak version of EMH, therefore, from their point of view, if technical analysis works, market efficiency will be called into question. (For more insight, read What Is Market Efficiency? and Working Through The Efficient Market Hypothesis.)

There is no right answer as to who is correct. There are arguments to be made on both sides and, therefore, it's up to you to do the homework and determine your own philosophy.

Can They Co-Exist?
Although technical analysis and fundamental analysis are seen by many as polar opposites - the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.

Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, having both the fundamentals and technicals on your side can provide the best-case scenario for a trade.

While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought.

Saturday, June 30, 2012

How to Make Money in Volatile Market (Elliott Wave Implementation)

Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact traded in repetitive cycles.

Elliott discovered that these market cycles resulted from investors' reactions to outside influences, or predominant psychology of the masses at the time. He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed "waves".

Elliott's theory is somewhat based on the Dow theory in that stock prices move in waves. Because of the "fractal" nature of markets, however, Elliott was able to break down and analyze them in much greater detail. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. Elliott discovered stock-trading patterns were structured in the same way.

Market Predictions Based on Wave Patterns
Elliott made detailed stock market predictions based on unique characteristics he discovered in the wave patterns. An impulsive wave, which goes with the main trend, always shows five waves in its pattern. On a smaller scale, within each of the impulsive waves, five waves can again be found. In this smaller pattern, the same pattern repeats itself ad infinitum. These ever-smaller patterns are labeled as different wave degrees in the Elliott Wave Principle. Only much later were fractals recognized by scientists.
In the financial markets we know that "every action creates an equal and opposite reaction" as a price movement up or down must be followed by a contrary movement. Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labeled these "impulsive" and "corrective" waves.

Theory Interpretation The Elliott Wave Theory is interpreted as follows:
  • Every action is followed by a reaction.
  • Five waves move in the direction of the main trend followed by three corrective waves (a 5-3 move).
  • A 5-3 move completes a cycle.
  • This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
  • The underlying 5-3 pattern remains constant, though the time span of each may vary.
Let's have a look at the following chart made up of eight waves (five up and three down) labeled 1, 2, 3, 4, 5, A, B and C.

You can see that the three waves in the direction of the trend are impulses, so these waves also have five waves within them. The waves against the trend are corrections and are composed of three waves.

Theory Gained Popularity in the 1970s
In the 1970s, this wave principle gained popularity through the work of Frost and Prechter. They published a legendary book on the Elliott Wave entitled "The Elliott Wave Principle – The Key to Stock Market Profits". In this book, the authors predicted the bull market of the 1970s, and Robert Prechter called the crash of 1987. (For related reading, see Digging Deeper Into Bull And Bear Markets and The Greatest Market Crashes.)

The corrective wave formation normally has three distinct price movements - two in the direction of the main correction (A and C) and one against it (B). Waves 2 and 4 in the above picture are corrections. These waves have the following structure:

Note that waves A and C move in the direction of the shorter-term trend, and therefore are impulsive and composed of five waves, which are shown in the picture above.

An impulse-wave formation, followed by a corrective wave, form an Elliott wave degree consisting of trends and countertrends. Although the patterns pictured above are bullish, the same applies for bear markets where the main trend is down.
Series of Wave Categories
The Elliott Wave Theory assigns a series of categories to the waves from largest to smallest. They are:
  • Grand Supercycle
  • Supercycle
  • Cycle
  • Primary
  • Intermediate
  • Minor
  • Minute
  • Minuette
  • Sub-Minuette
To use the theory in everyday trading, the trader determines the main wave, or supercycle, goes long and then sells or shorts the position as the pattern runs out of steam and a reversal is imminent.


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Saturday, June 16, 2012

Importance of Money flow

Money flow is the key for any scripts or any index to move up or move down. Money flow always control the smaller market. And every traders success depends on the proper reading of Money flow over specific script on specific time. Now the matter is how we can track the money flow which effect the script movement and get us the right timing. In naturally every uptrend started with avg money flow over 2-3days and after that next 2-3days volume getting dramatic change and money flow spreading over some selective sector or scripts, gradually volume getting higher and higher.Within 3-4days money flow change the dimension of the script and getting it in hit list and after that lots of rumor spreading in the sky and price and volume both r breaking all past record.

Now lets discuss about the most important part what is smart money and what is weak money. Smart Money means the money which get control over any script or index to move forward or downward. and weak money means when the smart money exited from the market and retailer and small investor bought in high rate and being caught for a period and trying to trade the script by averaging their price gap. when the market is in control of weak money no trend will be visible as all retailer and small investors will controlling the market by averaging their script. also some newbie will inject money thinking that in future market will be good and they will get good profit. Most of the small market get this effect after a mid level bull run. Weak traders are feeling that downtrend is over after index fall down in certain level and start buying which creates some dead cat bounce in index but in maturity again they feel that index will fall further and they sale out their holdings and create more sell pressure over index which put market in more downfall. This process running for a period of 10-15days in mid level downtrend due to lack of smart buyers.

At a certain level of index this weak traders feeling that nothing to lose now as they feel that they will go for longer version of investment as they have lose enough. This is the period when seller losing interest to sell and volume is stopping and decreasing day by day. Within this time smart money starting to consolidate and Market volume is gradually increasing 2-3days with positive nodes and within next 3 days money flow jumps overs as all idle smart money will show the competition to enter the market and this is the time to select the script where smart money jumps. In small market like Bangladesh big paid up good fundamental scripts will start to run because buyer can buy easily as much as they wish and can stop the seller to bid low. Also due to big paid up run index also showing the pace. As long as these smart money trying to control the market Index stayed in uptrend and day be day other weak money getting their price back and selling out their current holdings and starting to buy the running item for getting good profit. This is the period when smart money again selling out their script and keep away from market or keep interest to other sector other script. When smart money moves one sector to other market get stable. But when smart money not shifting from each sector or script to other sector or script market get weaker and weaker.

The main buzzwords of money flow is " The Smart Money always get the gain and the weak money need to take all pain". So be smart in your trade and be with the smart money.

Thursday, June 14, 2012

Leave Emotion from Your Trade,

We are human beings, feelings, emotions anxiety, is the common fen-minon of our life so we have emotion related with our business too. As stock Market is moving with our hardly owned money or loaned money from banks or others we have always had some feelings towards this money. We feel cheered by uptrend of our script and feeling gloomy in down trend of our script. DSE is a market where in morning you can fly but in evening you will cry.

Market is always create confusion, it always moves towards uncertainty no one can be sure what is going to happen tomorrow. Sometime the Market condition break down the traders mind.Trader can make worse decision by selling out all stock by loosing patience. Patience is one of the most active fact in any stock market. Some time patience kill your opportunity and sometime creates opportunity. so have to be cautious regarding keeping patience, Have to understand when to show panic and when to keep patience. But for maintaining all this strategy trader have to leave his/her emotion behind his/her eyes. have to do in logic not
by heart. Take it as a game and accept your defeat easily, but always try to win by using proper technic and logic. I heard some time some traders are telling that this script is bad, this script is unlucky for me but issue is all script will be lucky for you, if you get timing right.

Every trend has a full stop as like every sentences. No one way ticket for any stock market Bears are not always winner bulls can hit anytime. In downtrend we do not know where is the target so wait till your eyes see target and go for trade. Do not draw candle yourself by imaginary fact and with x factor. Lets the candle be drown by itself. As long as trader can manage their heart with eyes and logic success will come there after.

M Rahman Emon

Tuesday, June 12, 2012

Trading Strategy for any Stock Market

One of the most important money making platform of the world is stock market where money makers making money by trading and investing. Stock Market moves towards the emotion and good/bad feel factors of time. Stock Market ups and down can not be controlled its like flowing stream. Lots of people follow lots of theory strategy and mathodes to earn all gold coin but the percentage of gold coin winner is very little and these little part are the controller of any stock market.

Now get back to Bangladesh Stock Market for example, In Bangladesh right now Stock Market is like Whuhung-Hu of China in past centuries. As i talked before Stock Market is a platform for money makers to make money , Bangladesh is the perfect place for that- its a very small market with little amount of listed companies where all influencer know every price sensitive information and can broadcast as rumor on the air to pull up the market and also pull down the market. This is the place where everyone go for panic buy in upward stream and panic sale in downwards fountain.

In every stock market looser always loose and gainer always gain, This is simple strategic words we know but we do not follow because after loosing we want to recover the losses by investing more or wait for unlimited time.In Stock Market after investment we actually do not know what will be in future. We can predict through some FA-TA and future prospect of the sector and the company we invested. so in any case stock market is the most unpredictable place of investment what we should remember before investing a penny here.

Now lets get back to the title  of this writing , How to trade in Stock Market or the trading strategy of Stock Market in current scenario specially for small and middle size of investor. Lots of people using lots of strategy and at the last night luck will be the decision maker of i am giving some point out discussion.

1) Do not Trade on Emotion and Excitement

2) When any rumor starting to grow try to find out the rumor and the trade volume of the script if trade volume increased gradually in last 3-5 days with avg 5% Price hike go for BUY and SaleOUT your stock when the rumor become news.

3)Do not see any script when Index is in downtrend and do not try to find any bottom index, as Index has no bottom and also market will not follow any previous support.

4)For BUY in downtrend market you have to follow certain things, number one choose the most decreased item, Choose the Big Paidup top ten item of last 30days in down/up trend it will be safe , BUY any item when RSI reached 26-30 level - Go for full investment when RSI reached 28.

5)Every Uptrend of market will be a opportunity to make money double, but need to be full cautious in selecting script - Always follow top ten item for last 10days and avg volume - If a scripts volume increases gradually and then volume jumps after 2-3days with positive price movement go for BUY on that day.

6) Another way to of start Buying is to wait for Index Confirmation if Index get a support in any space and gradually start uptrend with increasing Volume BUY after 3 day observation. and Buy the most traded script means the most active script of last 3-4days.

7) One of the most important issue for market is taking STOPLOSS in right time, Now i am writing when it will be the best time to take STOPLOSS and stayout from Market. STOPLOSS is a strategy where u have to set your mind first that you are taking loss willingly to save more money from loss. Suppose your Buy rate of a script is 50tk u have to set a minimum loss price target where u took stoploss suppose u took stoploss on 47tk means u lost 3tk/share but due to market downtrend u can buy same script after a certain period even in 40tk where it will be easy for you to recover previous 3tk loss by selling this script in 45tk. This is the simple procedure of stop loss. but question is when you will make decision of taking this? In market all scripts mechanism based on INDEX movement so you have to follow the index move and in an average volume move. When market is in uptrend volume will increase day by day but at the end point volume is shaking and the day when volume jumps high and crosses last 5-6days average volume and at the day end index closed in Red Zone, Next day morning will be the best day of Sale even Take Stoploss and stayout of Market as long as new trend starts. Whatever loss u have in that day you should make cash and wait for next uptrend confirmation or as i mentioned the Buying mathodes in Number 4 to 6 column.

Hope this writing will help trader like me specially on Bangladesh Stock marketo save his soul, right now profit is not the issue for most of the trader  who have been enormously injured by 2010-11. Wish all will live life better then yesterday.

M Rahman Emon